Best Practices, Observations & Insights
Sales Incentive Design
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To Be Covered…
Indicators that your sales incentive plans may not be working
Sales incentive design best practice
The design process – an overview
Choosing the right performance measures
The importance of Financial Modeling
Post-mortem review
When to use commissions, when not to…
Straw Dog Model & Bonus Calculators Demo
Your Questions
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Indicators your sales incentive plans are not working well…
Sales professionals do not believe in the credibility of their sales performance numbers used to calculate bonus
They don’t feel they are fairly credited for their efforts
They routinely question their bonus payouts
Your superstars don’t believe their targets are achievable… …Don Quixote’ Targets Too many sales professionals are not achieving threshold = no bonus
Too many sales professionals are not achieving target
Superstars are not getting significantly larger bonus than average payout
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Indicators your sales incentive plans are not working well…continued
There is infighting between sales management and sales professionals regarding priorities Sales pro’s make the easy sale and don’t go after more difficult and
profitable customers
Sales professionals and sales managers bonus objectives not aligned… Sales professionals make “easy” sales , not inclined to sell less profitable
products …e.g., sales pro plans based exclusively on sales volume
Sales managers want more sales of more highly profitable products e.g., sales manager incentive plans based mostly on profit
Sales professionals and sales managers are at odds on priorities/objectives
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Indicators your sales incentive plans are not working well…continued
Sales managers believe their bonus does not reflect the performance of their district, region, product line portfolio
After a certain point in the year, your superstars don’t bring in any more business
You have high turnover of your consistently strong performers
Performance on one component influences payout on another i.e., linking components
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Indicators your sales incentive plans are not working well…continued
• Sales pro’s believe they’re getting penalized for stuff they can’t control
• Sales force seems too content with their targets, maybe they know something you don’t?
• No arguments, too quiet out there…
• Performance reviews duplicate bonus payout results…
Reviews focus on “what” is achieved rather than “how” results are achieved…
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Indicators your sales incentive plans are not working well…continued
• Plan communication launched several months after plan effective date…
• Business leader objectives are not aligned with sales incentive goals
• Business leaders think their sales incentive plans are working, sale force does not share their view…
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Sales Incentive Design Best Practice
• Plans are simple | easy to understand…
• No more than 4 components max – fewer is better… – Components should never be less than 20% weighting
• Designed to deliver the business objectives
• Carefully considers the behaviors they’re intend to drive
• Aligns goals across all levels of sales pro’s and sales mgmt
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Sales Incentive Design Best Practices…
• Strong “Line–of–Sight” of job responsibilities and ability to impact bonus
• Financial modeling conducted to ensure…”You can afford the “Cost of Success”
• Highly differentiates bonus payouts of star performers from median performers
• Carefully thought out and executed communication plans to ensure participants understand how new plans work to get “buy-in”
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Sales Incentive Design Best Practices…
• Performance accurately measured and tracked – progress against goals frequently reported
• Carefully thought out communication plans – • plan launch delivered one week prior to or week of plan effective date
• Plans reviewed periodically (every year at a minimum) – – To ensure they’re driving the right behaviors
– Rewarding the right outcomes and results
– Align with evolving business objectives
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Sales Incentive Design Process
Plan Design
Financial Modeling
Rollout Post-mortem
Review
Plan Review
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Understanding the Culture…
Review Plans
Assess current plans
Interview Business Head, Head of Sales, Head of Marketing, CFO, Business Controller
Conduct market competitive analysis of sales force
Interview sales force
o Distribute questionnaires
o What do they like about their current plans, what don’t they like?
o Ride alongs…accompany sales pro on sales/customer calls
Review plan documents
Did the plans work as intended? What worked? What didn't?
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Designing New Sales Incentive Plans
Design Considerations may include How long is sales cycle? (gestation period) “Hunter” vs. “Farmer” role Threshold Target Sales performance measures – measurement systems capabilities oWhat can we accurately measure and track?
Commission plans vs. base salary + bonus Incentive components o Sales dollars invoiced vs. received? o Profit measures – Ask the question…How can sales pro’s impact profit? o Team measures o New Business o Premium Products
Design
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Importance of Financial Modeling
Financial Modeling
Financial Modeling – Can we afford the cost of success? ◦ Compares new plan to current plan
◦ Same performance period(s)
◦ Does new plan payout more or less than for same results?
◦ Does new plan adequately differentiate reward based on performance?
◦ Opportunity for critical amendments to ensure plan success
◦ Component weightings
◦ performance measurement choices
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Implementation & Rollout
oWell thought out and executed communication plans are key to success o Consider the culture of the organization/business unit…
oTiming of implementation is critical…ideally, communicate plan one week before or week of plan effective date. Tiered or targeted rollout
◦ Sr. Management ◦ Sales Management ◦ Sales Professionals
“Town Hall” meetings (at end of meeting) Hand outs – Straw Dog Models, Plan Documents
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Rollout
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6 months after implementation…
6 months after roll-out…
Did we drive the right sales behaviors?
Did we reward the right results and outcomes?
Statistical analysis of bonus payouts…
• What does the distribution of bonus payouts look like?
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Post-mortem Review
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Choosing the right performance measures…
o What are your current systems tracking and reporting capabilities?
Which performance measures are credible with the sales force?
New measures – will your systems measurement capabilities be up to par at plan effective date? If not… measures should not be used as it can negatively impact plan credibility
Will sales professionals be provided with accurate and reliable reports?
• How often?
• The more frequent the better!
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Choosing the right performance measures…
o Simplicity – four or less components, the less the better
Component weightings should never be less than 20%
Resist the temptation to link components
o Keep incentive components independent
o Negative reinforcement works well for extinguishing behavior, not driving behavior
o Pay for the right results and right outcomes, not activities
Caveat – paying for the right activities can make sense in limited and specific circumstances…
When sales professionals are new in role (e.g., first six months)
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Choosing the right performance measures…
o Line—of—sight consideration
Ask yourself the following questions… • Can sales professionals impact this measure?
• Barometer - what was the sales force reaction to proposed measure?
Resist temptation to incorporate complex profit measures to align with Finance goals! • If sales professionals cannot impact chosen profit measures it’s really
profit-sharing
• If target setting is fairly good, consider uncapping !
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Choosing the right performance measures…
Team components…be careful!
Line—of—sight considerations
Team measures may work…provided…
o Sales professionals work together and depend on one another
e.g., large multi-site accounts…
o Team selling behaviors are key to success of business model e.g., Sales Pro’s work alongside Technical Service Pro’s
o If sales professionals work independently team measures can be a disincentive
Too highly weighted team measures can protect weak performers
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Other plan design considerations…
• Impact of culture on incentive plan design…
– What is commonly practiced in region? (e.g., NA, SA, EMEA, APAC, ANZ)
• There are differences – Commissions are more common in China
– Discretionary in Japan
– Team components more common in Europe
– What is most commonly practiced in industry sector?
– What are business leaders’ preferences?
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Other plan design considerations…
• What is most commonly practiced in the industry sector?
A. Commission Plans?
B. Bonus + Incentive Target?
• What are the difference between the two? – Commission payouts start from dollar one of sales or profit
measure
– Bonus + incentive target payouts start at threshold
• What are the business leaders’ preferences?
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Importance of Financial Modeling…
Does new plan payout more or less for same results? ◦ Compare same performance period – new vs. current plan ◦ Statistical summary of payouts…
• What percentage of sales pro’s earn minimal bonus?
• What percentage are hitting target? (around 50% - 65%)
• If more than say 65%, targets might be too easy to achieve…
• How much are your star performers earning as a multiple of median
bonus payouts? (should be 2 – 3x times median payout)
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Importance of Financial Modeling…
Does new plan payout more or less for same results?
If it plan pays more overall, revisit component weightings
If there are slope changes, are they in the right place?
If median and below performer payouts are higher…
Possible design issues to be corrected
How good is target setting?…review
Conduct historic trends analysis
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Example: Financial Modeling 25
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When to use commissions…
When commissions work… • Short sales cycle/gestation period
• New markets
• New products / new business
• Pure hunter roles
• Business development roles
• Hybrid sales mgr roles that have direct sales
• Territory sizes or growth goals very similar
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When not to use commissions…
• When commissions don’t work
– Long gestation period (e.g., 1+ years)
– Mature markets
– Declining markets
– Pure farmer roles …“relationship management”
• National accounts / very large chain accounts – e.g., Best Buy, Costco, Home Depot, Wal-Mart…
• Targets are highly differentiated by territory, accounts, region etc.
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Example: Sales Incentive Design…Straw Dog Model
o Straw Dog Model
• Purpose: simple one-page illustration of incentive plan; components, features, criteria, and bonus opportunity
• Captures incentive plan design in easy to understand format versus plan legal documents
• Facilitates buy-in…
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Straw Dog Model…
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Bonus calculator…
Promotes line—of—sight! o Enables sales pro’s and their managers to accurately
calculate their commissions or bonus and get instant feedback
o Sales pro’s and their managers can model/forecast what their commissions or bonus would be based on various performance scenarios
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Bonus Calculator
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Bonus Calculator
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Bonus Calculator
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Bonus Calculator
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Bonus Calculator
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Your Questions
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